Ethical Considerations for Trustees

Glenn Doggett, CFA InstituteSuzanne Dugan, Cohen Milstein Seller & Toll PLLC

NCPERS Conference24 May 2017

Overview

• Trust-levels in the Market Today

• Fiduciary Elements for Trustees

• Political Contributions

TRUST-LEVELS IN THE MARKET

TODAY

Industry Trust RankingsHow much do you trust the following industries to do what is right?

74%

64%

61%

60%

60%

58%

51%

Technology

Food & Beverage

Consumer Packaged Goods

Telecommunications

Automotive

Energy

Financial Services

2016 Results

75%

66%

65%

63%

63%

62%

54%

Technology

Food & Beverage

Automotive

Consumer Packaged Goods

Telecommunications

Energy

Financial Services

2017 Results

Source: 2017 Edelman Trust Barometer®

Dual Roles of Pension Board Trustees

Client of Outside Service Providers Service Provider for Beneficiaries

Alignment of ethical conduct and expectations across both roles is important

Typical Ethical Issues Faced by Trustees

• Expenditure of plan assets

• Relationships with third-parties

• Gifts

• Using position for personal gain

• “Pay to play”

• Other conflicts of interest

FIDUCIARY ELEMENTS FOR

TRUSTEES

Fundamental Ethical Principles1. Act in the best interests of

plan participants

2. Use reasonable care and prudent judgment

3. Act with skill, competence, diligence

4. Maintain independence and objectivity

5. Abide applicable law

6. Deal fairly among plan participants

7. Act consistently with the plan mission

8. Review/monitor effectiveness of service providers.

9. Maintain confidentiality

10. Communication/ transparency

Client Interest Comes First

1. Act in good faith and the best interest of plan participants and beneficiaries.

• Consider different types of beneficiaries and participants

• Hold their interests above interests of plan sponsor• Do not be swayed by outside interests• Balance long-term returns vs. need to make

current payments

Reasonable Care and Diligence

2. Act with prudence and reasonable care.

• Avoid harm to plan participants & beneficiaries• Act in good faith• Follow plan parameters• Rely on third party service providers• Delegation to internal professional experts

Reasonable Care and Diligence

3. Act with skill, competence, and diligence.

• Knowledge of: Policies, strategies, investments, etc.

• Engage in educational, training opportunities • Seek appropriate professional guidance• Some investment may required more thorough

investigations and analysis

Avoid/Manage Conflicts of Interest

4. Maintain independence and objectivity by avoiding conflicts of interest.

• Avoid appearance of impropriety• Place duty to pension plan ahead of appointing entity• Avoid personal conflicts• Avoid relationship with service providers• Refuse gifts• Disclose conflicts• Ensure policies and procedures in place to address

conflicts

Proper Conduct

5. Abide by all applicable laws, rules, and regulations, including the terms of the plan documents.

• Consult with professional advisors• Ensure updated compliance procedures• Report suspected illegal activities, irregularities

Objective Engagement

6. Deal fairly, objectively, and impartially with all participants and beneficiaries.

• No preferential treatment to a particular class• Balance interests of all beneficiaries and

participants

Consistency of Actions

7. Take actions that are consistent with the established mission of the plan and the policies that support that mission.

• Draft and review policies addressing risk tolerances, return objectives, liquidity requirements, tax considerations, etc.

• Take action consistent with policies• Consider suitability of investments • Achieve appropriate investment blend

Assess Goals and Performance

8. Regularly review the efficiency and effectiveness of the plan’s success in meeting its goals, including assessing the performance and actions of plan service providers including investment managers, consultants, actuaries, etc., on a regular basis.

• Develop rules for employing investment managers• Ensure managers employ qualified personnel• Ensure managers comply with professional

standards• Review performance of managers

Preservation of Confidentiality

9. Maintain confidentiality of plan, participant, and beneficiary information.

• Individual information• Competitive ability (transactions, holdings, etc.)• Privacy policies relating to handling such info

Full and Fair Disclosure

10.Communicate with participants, beneficiaries, and supervisory authorities in a timely, accurate, and transparent manner.

• Full and fair disclosure• No misrepresentation• Regular communication• Plain language, effective communication

POLITICAL CONTRIBUTIONS

Political Contributions – “Pay to Play”• Harms Caused By Pay to Play Practices

• Selection of managers not based solely on merit• Higher fees • Loss of public confidence in decision-making process• Reputational damage• Ethics investigations• Criminal convictions• Regulatory enforcement actions• Civil enforcement actions

The SEC’s “Pay to Play” Rule • Rule 206(4)-5

• To whom does the rule apply?• What does the rule prohibit?• What are the remedies for a violations?

Political Contribution Enforcement Actions • Court challenge to SEC Rule dismissed• SEC’s first enforcement action (2014)• SEC settles with 10 public fund money managers (2017 )• SEC expands scope of enforcement:

• Coordinates with law enforcement on public pension pay to play (2016)

• Applies its general anti-fraud rule, rather than Rule 206(4)-5, to political contributions (upheld 2017)

Best Practices for Public Pension Trustees• Education:

• Pension trustees and staff must be knowledgeable of rules prohibiting political contributions and how to protect fund assets and decision-making

• Policies and procedures –rules apply and compliance should be monitored throughout duration of investment• Initial due diligence/representations • Ongoing monitoring • Consider remedies in management agreements • Treatment of violations – timing, compensation

Takeaways for Public Pension Trustees• Rule is important tool to prevent undue influence on

pension investment decision-making and protect fund assets from suboptimal investments and fees

• Pension Trustees and staff are first line of defense • Far better to prevent violations than rely on enforcement

actions